If you’re like many Americans, chances are you put saving on your back burner the past couple years.
The personal savings rate, which measures the percentage of your disposable income that you save, has historically averaged 8.45% from 1959 until now. For obvious reasons, that rate soared to 33% during the height of the COVID-19 pandemic in 2020. Today, the rate is hovering around 3%.
The low savings rate may sound alarming. In context, though, it makes a bit more sense. As inflation rates hit record highs in 2022—and prices for everyday items like groceries remained high in the time since—it became exceedingly difficult to sock away money. The stock market also has been steadily gaining since the recession in 2009, offering better returns than savings accounts for much of the past 15 years.
However, the headwinds that worked against savers for years began to wane when the Federal Reserve interest rates were raised multiple times starting in 2022 to combat inflation—this, after effectively plummeting to 0% in 2021 to help stem the economic downturn. The rate has held steady at 5.5% since July 2023, which has been ideal for saving. Yet, the personal savings rate remains low.
That said, if you’re still reticent to save, you may want to begin rethinking your savings strategy.
Why now?
The Fed has given clear signals that the central bank will cut its interest rate in September 2024. But wait, wouldn’t that be detrimental to your savings strategy? The cut is projected to be minimal, meaning the rate will still be attractive for long-term saving. While higher interest rates are suboptimal for borrowers, those who are in the habit of stashing away extra money welcome an uptick. The reason is simple: Higher rates produce better returns on investment. In addition, the relative calm of a guaranteed return on investment—a defining characteristic of most savings vehicles—is a bit more appealing when the stock market becomes less predictable. And most importantly, a strong savings portfolio can help mitigate the negative effects of inflation.
Where to start
Individually speaking, setting up a strong savings portfolio isn’t hard, but it does take a bit of planning. Setting goals is a good place to start:
- Are you creating an emergency fund? A general rule of thumb is to keep the equivalent of between three months to nine months of expenses stashed away for a rainy day.
- Are you saving up for a vacation, a child’s education, home-improvement project, or some other out-of-the-ordinary expense?
Setting goals should help a saver determine the best vehicle. But many — including an entire generation of young adults — have never seriously considered savings products beyond conventional savings accounts. Such savings accounts do offer easy access to funds, but most typically pay lower interest rates than some other basic saving vehicles. That makes conventional accounts ideal to stash away emergency cash, but less desirable for long-term savings.
Alternate savings options
Money markets help with higher balances by offering higher interest rates, but if you drop below a specified balance, penalties may apply. Certificates of Deposits, also known as CDs or Certificates at credit unions, are better suited for long-term savings. CDs offer higher rates and fixed terms, and the longer the term, the higher the rate. The caveat is that penalties often apply for withdrawing funds early. (Saving for retirement is another matter, and you’d be best off seeking the advice of a financial advisor. Tools such as annuities offer tax benefits that need to be considered.)
Not understanding the full range of available savings vehicles is a mistake. Such products often offer higher interest rates than conventional savings accounts without increasing the near-zero risk associated with savings. And the restrictions on withdrawals on products such as CDs, for instance, can lessen the temptation to dip into savings, preserving what a saver has worked so hard to build.
The bottom line is that using safer, guaranteed-return savings vehicles can help savers achieve financial security and better weather any changes that will come.
